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Farm debt likely to increase for 2021

Farm debt likely to increase for 2021

Farrm scene with ghosted money

Some farmers may soon be walking into a bank with their hand out and walking out with their fingers crossed.

An unprecedented combination of high yields, high prices and high input costs paint a picture of a volatile farm economy.

Add to that expected interest rate increases next year and there could be uncomfortable increases in debt.

Debt-to-asset ratios decreased in 2020 and interest rates continued to fall. Much of that can be attributed to the COVID pandemic, according to Bradley Zwilling. But 2021 will likely look much different.

“Debt is increasing because machinery is really high, land is really high and there will be an increase in inputs for 2022 for operating loans,” said Zwilling, vice president of data analysis with Illinois Farm Business Farm Management. “And our farms are getting larger. You’re going to need more to operate those farms.”

Glenn Semple of Farm Credit Illinois said the farm economy is healthy overall. But in looking forward, he sees many factors that could force farmers to increase their debt load.

“It will be much more expensive to plant a crop in 2022 than probably ever,” he said. “Inflation is real. The price of fertilizer, land and equipment is all significantly higher than it was 12 to 24 months ago.”

Semple said he has been to several auctions recently where farmland sold for thousands more per acre than it would have a few years ago. He said some farmers who are riding high yields and commodity prices into more debt should be careful.

“There are some operations that are heavily leveraged operationally, with very high-dollar cash rents and large cash-rents bases,” he said. “Those operations probably are at the most risk, and it’s not necessarily because of interest but because we appear to be making some long-term decisions on what might be short-term commodity price movements.”

With most economists expecting the Federal Reserve to hike rates at least once in 2021, highly leveraged farmers may want to consider cleaning up some of their debt.

“I think they need to be looking at higher interest rates and see if they’re at a point to refinance them,” Zwilling said. “We’re going to be borrowing some money. We’re over $1,000 a ton for anhydrous. Phosphorus and potash is going up too.”

According to USDA, debt per tillable acre has grown from $20.72 in 1991 to $24.74 in 2019. In 2004 it fell to a low of $15.20. But the increase has been steady over the past six years.

As with many things, the farm debt trend was skewed in 2020 because of the pandemic. Ad-hoc and PPP (Paycheck Protection Program) payments were made by the federal government to small businesses including farms. While those payments helped cover some expenses, further government assistance is not likely in 2022.

Farmers could be taking on added debt through both operating and term loans as they go into planting. And the prospect of interest rate hikes could tack on more.

“We have been pretty aggressive about urging our customers to consider locking in interest rates, and have been for the better part of a year or year and a half,” Semple said.

Regardless, Semple said such hikes likely won’t be jarring.

“I don’t foresee a problem over the next one to two years,” he said. “Interest rates are going to go up pretty gradually. That’s been the Federal Reserve’s forward guidance. They’re going to end their bond-buying program first before they raise rates. Then they will be very judicious about raising rates.”

Zwilling warned against making capital purchases in order to lock in lower rates.

“We always say don’t go out and buy piece of equipment for the tax,” he said. “Be careful to add debt just to get a tax deduction. Pay down some of those higher interest rates.”

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Nat Williams is Southern Illinois field editor, writing for Illinois Farmer Today, Iowa Farmer Today and Missouri Farmer Today.

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